AUDIT EVIDENCE 4.

97

8. ANALYTICAL PROCEDURES (SA 520)

8.1 Meaning of Analytical Procedures

Since routine checks cannot be depended upon to disclose all
the mistakes or manipulation that may exist in accounts,
certain other procedures also have to be applied like
comparisons, trend and ratio analysis in addition to
reasonable tests. These collectively are known as overall tests.
With the passage of tests, analytical procedures have acquired
lot of significance as substantive audit procedure. SA 520 on
Analytical Procedures discusses the application of analytical
procedures during an audit. Let us try to understand the concept discussed above
with the help of the following illustration:
ILLUSTRATION 9
CA Aarav wants to verify the payments made by XYZ Ltd. on account of building rent
during the FY 2022-23. The rent amounts to `50,000/- per month for the year. The
monthly rent payments are consistent with the rent agreement. However, the other
companies in the similar industry are paying rent of ` 10,000/- per month for a

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 4.98 AUDITING AND ETHICS

similar location. How will applying the analytical procedures impact the verification
process of such rental payments by XYZ Ltd.?
SOLUTION
If CA Aarav checks in detail the monthly rent payments, he may find that such
payments are consistent with the rent agreement i.e. XYZ Ltd. paid ` 50,000/- per
month as rent and the same is getting reflected in the rent agreement. Here, CA
Aarav may not be able to find out the inconsistency in the rent payment with
respect to rent payment prevalent in the similar industry for rent of the similar
location.
If CA Aarav applies analytical procedure i.e. compares the rent payment by XYZ Ltd.
with the similar payments made by companies in similar industry and similar area,
he will notice an inconsistency in such rent payments as the other companies are
paying a very less monthly rent in similar industry for similar area.

However, if CA Aarav does not make such comparison and only checks the monthly
payments and rent agreement of XYZ Ltd., he would not have found such
inconsistency and as such the misstatement may remain undetected.
Meaning of Analytical Procedures. As per the Standard on Auditing (SA) 520
“Analytical Procedures”, the term “analytical procedures” means evaluations of
financial information through analysis of plausible relationships among both
financial and non-financial data. Analytical procedures also encompass such
investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by
a significant amount.

through among both

Analytical evaluations of
analysis of financial and
Procedures financial
plausible non-financial
means information
relationships data.

ILLUSTRATION 10
Analytical procedure involves analysis of relationship among financial and non-
financial data. Explain with the help of an example as to how, the statutory auditor
of ABC Ltd. will analyse such relationship with respect to the total wages paid by ABC
Ltd. during the FY 2022-23.

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 AUDIT EVIDENCE 4.99

SOLUTION

As per SA 520, Analytical Procedures means evaluations of financial information

through analysis of plausible relationships among both financial and non-financial
data. The following example explains the analysis of relationship between financial
and non-financial data while applying analytical procedures.

The statutory auditor of ABC Ltd. has to verify the total wages paid by the company
having factories in various states. He can verify the same by analyzing the
relationship between wages per worker and total number of workers across all the
factories.

i.e. Total wages = Wages per worker x Total number of workers.

Here wages per worker is financial data i.e. in ` and total number of workers is a
number which is a non financial data. Thus, the statutory auditor of ABC Ltd. is
evaluating financial information i.e. total wages paid (in `) by analyzing the
relationship between wages per worker (in `) which is financial data and number of
workers which is a non financial data.

Analytical procedures include the consideration of comparisons of the entity’s

financial information with as well as consideration of relationships.

Comparisons
of the entity's Consideration
Various other Analytical
financial of
procedures procedures
information relationships
with

Examples of Analytical Procedures having consideration of comparisons of the

entity’s financial information are:
♦ Comparable information for prior periods.

Example:

CA Brijesh, while verifying the travelling expenses of PRT Ltd., may compare the
travelling expenses of current year amounting to ` 2.50 lakhs with previous year
travelling expense of PRT Ltd. amounting to ` 2 lakhs and infer that there has been
an increase of 25% in the travelling expense incurred by the company. CA Brijesh
may compare such percentage increase with the trend of the earlier several years.

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 4.100 AUDITING AND ETHICS

Thus, CA Brijesh, can use comparable information for prior periods of PRT Ltd. while
applying analytical procedure with respect to the expenses incurred by the
company.

♦ Anticipated results of the entity, such as budgets or forecasts, or expectations

of the auditor, such as an estimation of depreciation.
♦ Similar industry information, such as a comparison of the entity’s ratio of sales
to accounts receivable with industry averages or with other entities of
comparable size in the same industry.
Examples of Analytical Procedures having consideration of relationships are:
♦ Among elements of financial information that would be expected to conform
to a predictable pattern based on the entity’s experience, such as gross
margin percentages.
♦ Between financial information and relevant non-financial information, such as
payroll costs to number of employees.
ILLUSTRATION 11

Particulars Client Industry

Year 2021-22 2022-23 2021-22 2022-23
Inventory Turnover 2.8 2.9 3.1 2.8
Gross Margin 22.5% 22.7% 23.6% 22.2%

♦ Various methods may be used to perform analytical procedures.

♦ These methods range from performing simple comparisons to performing
complex analyses using advanced statistical techniques.
♦ Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information.
Thus, we can say that Analytical Procedures may be segregated into the following
major types:
♦ as comparison of client and industry data,
♦ comparison of client data with similar prior period data,

♦ comparison of client data with client-determined expected results,

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 AUDIT EVIDENCE 4.101

♦ comparison of client data with auditor-determined expected results and

♦ comparison of client data with expected results, using non financial data.

8.2 Scope of SA 520

SA 520 deals with the auditor’s use of analytical procedures as substantive
procedures (“substantive analytical procedures”), and as procedures near the end
of the audit that assist the auditor when forming an overall conclusion on the
financial statements.

Objectives
The objectives of the auditor are:
(a) To obtain relevant and reliable audit evidence when using substantive
analytical procedures; and
(b) To design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the
financial statements are consistent with the auditor’s understanding of the
entity.

8.3 Purpose and timing of Analytical Procedures

8.3A Purpose of Analytical Procedures

Analytical procedures use comparisons and relationships to assess whether account
balances or other data appear reasonable.
For instance, establishing the relationship that exists between certain balances
included in the Balance Sheet and the Statement of Profit and Loss and comparing
them with those that existed between the same set of balances in the previous year,
reconciling the physical balances of assets with the relevant financial record;
obtaining of account from the bankers, account receivables and account payables
and reconciling with relevant balances in books of account; confirming amounts of
outstanding income and expenses by preparing reconciliation statements, etc.
These are helpful in the detection of unusual state of affairs and mistakes in
accounts.

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Example

In XYZ Ltd., after applying analytical procedures as comparison of the gross profit
ratio with that of the previous year, it is discovered that there has been fall in the
ratio. Therefore, it became necessary for the auditor to make further enquiries as
it may be due to pilferage of inventories/ misappropriation of a part of the sale
proceeds/ a change in the cost of sales without a corresponding increase in the
sales price.

On verifying the balances of sundry account receivables by obtaining the

confirmation of their statements of account, it will be possible for the auditor to
find out whether the discrepancy in the balance of an account receivable is due to
the failure to debit his account with the cost of goods supplied to him or is the
result of non-adjustment of a remittance received from him.

Also whether in the case of account payable, the discrepancy is due to failure to
afford him credit for one or more consignments of goods supplied by him or failure
to debit him with an amount of remittance.

In case of inventories of raw materials and stores at the end of the year any
excesses or shortages therein shall be detected. The investigation of their causes
might disclose that the shortages were the result of a misappropriation of inventory
or that the excess were due to requisitions having been entered before the
inventories were issued.

By reconciling the amounts of interest and dividends collected with the amounts
which had accrued due and that which are outstanding for payment, the mistake,
if any, in the adjustment of such an income would be detected.

The overall tests can be extended for making inter-firm and intra-firm
comparison of trading results.
Example

If balances included in the Statement of Profit and Loss of an entity are compared
with those contained in the Statement of Profit and Loss for the same period of
another entity engaged in the same trade and working under similar circumstances,
it would be possible to find out the cause of the variation in the rate of profitability
that exists.

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♦ Similarly, it would also be possible to compare the balances on the

Statement of Profit and Loss with that of the previous period, it would be
possible to find out the reasons for increase or decrease in the amount of
profits of those years.

♦ By setting up certain expenses ratios on the basis of balances included in the

Statement of Profit and Loss, for the year under audit, comparing them with
the same ratios for the previous year, it is possible to ascertain the extent of
increase or decrease in various items of expenditure in relation to sales and
that of trading profit in relation to sales.

♦ If differences are found to be material, the auditor would ascertain the

reasons thereof and assess whether the accounts have been manipulated to
inflate or suppress profits.

An abnormal fall in the cost of manufacture

or that in the administrative cost, apart from
economy in expenses, there could be no
provision or less provision for expenses
incurred in the year. When it is suspected, the
auditor should compare the entries in the
outstanding book with those in the previous
year. He must also check the vouchers for one
month immediately before the close of the following years. To verify that none of
the expenses in the accounts under audit have been charged to the accounts of the
following years.

Often it is possible to independently verify the correctness of some of the items of

expenses included in the Statement of Profit and Loss.

For instance, the cost of importing goods which are subjected to an ad-valorem
duty at uniform rate can be verified from the amount of duty paid. Similarly, a
quantity of sugar sold by sugar mill can be verified independently from the amount
of GST paid.

Similarly, the amount of any income or expenses which has a direct relationship
with the amount of profits or that of sales can be verified independently, e.g.,

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commission paid to a manager calculated on the basis of net profits, commission

paid to a selling agent as percentage of sales, etc. Such calculation of ratios, trends
and comparisons is also termed as analytical review.

Thus, it is important to note that Analytical procedures may help identify the
existence of unusual transactions or events, and amounts, ratios, and trends that
might indicate matters that have audit implications. Unusual or unexpected
relationships that are identified may assist the auditor in identifying risks of
material misstatement, especially risks of material misstatement due to fraud.

8.3B Timing of Analytical Procedures

Experienced auditors use analytical procedures in all stages of the audit. Analytical
Procedures are required in the planning phase and it is often done during the
testing phase. In addition, these are also required during the completion phase.

Timing of Analytical
Procedures

Planning Testing Completion

Phase Phase Phase

8.3C Analytical Procedures in Planning the Audit

In the planning stage, analytical procedures assist the auditor in understanding the
client’s business and in identifying areas of potential risk by indicating aspects of
and developments in the entity’s business of which he was previously unaware. This
information will assist the auditor in determining the nature, timing and extent of
his other audit procedures. Analytical procedures in planning the audit use both
financial data and non-financial information, such as number of employees, square
feet of selling space, volume of goods produced and similar information.

For example: Analytical procedures may help the auditor during the planning
stage to determine the nature, timing and extent of audit procedures that will be
used to obtain audit evidence for specific account balances or classes of
transactions.

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8.4 Substantive Analytical Procedures

The auditor’s substantive procedures at the assertion level may be tests of details,
substantive analytical procedures, or a combination of both. The decision about
which audit procedures to perform, including whether to use substantive analytical
procedures, is based on the auditor’s judgment about the expected effectiveness
and efficiency of the available audit procedures to reduce audit risk at the assertion
level to an acceptably low level.

The auditor may inquire of management as to the availability and reliability of

information needed to apply substantive analytical procedures, and the results of
any such analytical procedures performed by the entity. It may be effective to use
analytical data prepared by management, provided the auditor is satisfied that such
data is properly prepared.

8.5 Factors to be considered for Substantive Audit

Procedures
Availability of Data

Disaggregation

Account type

Source

Predictability

Nature of Assertion

Inherent Risk or "What can go Wrong"

The auditor should consider the following factors for Substantive Audit Procedures:
i) Availability of Data – The availability of reliable and relevant data will
facilitate effective analytical procedures.
ii) Disaggregation – The degree of disaggregation in available data can directly
affect the degree of its usefulness in detecting misstatements.

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iii) Account Type – Substantive analytical procedures are more useful for certain
types of accounts than for others. Income statement accounts tend to be
more predictable because they reflect accumulated transactions over a
period, whereas balance sheet accounts represent the net effect of
transactions at a point in time or are subject to greater management
judgment.
Example

We can analyze data to understand the relationship to another account and

through this, disaggregate the transactions flowing to and from the balance
sheet account (e.g., sales and cash receipts flowing through trade
receivables), or to compare ratios over time as this enhances our ability to
obtain audit evidence for balance sheet accounts.

iv) Source – Some classes of transactions tend to be more predictable because

they consist of numerous, similar transactions, (e.g., through routine
processes). Whereas the transactions recorded by non-routine and estimation
SCOTs (Significant Classes of Transactions) are often subject to management
judgment and therefore more difficult to predict.

Example

Transactions of routine nature like transactions related to sales and purchases

are predictable and repetitive in nature. Therefore, on such data analytical
procedures can be efficiently applied.
However, Significant Classes Transactions are those classes of transactions in
a company’s operations that are key to the financial statements and are not
frequent in nature. Example: Expenditure on Research & Advertisement is not
of routine nature and are subject to management judgement and therefore
more difficult to predict.

v) Predictability – Substantive analytical procedures are more appropriate

when an account balance or relationships between items of data are
predictable (e.g., between sales and cost of sales or between trade receivables
and cash receipts). A predictable relationship is one that may reasonably be
expected to exist and continue over time.
vi) Nature of Assertion – Substantive analytical procedures may be more
effective in providing evidence for some assertions (e.g., completeness or

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 AUDIT EVIDENCE 4.107

valuation) than for others (e.g., rights and obligations). Predictive analytical
procedures using data analytics can be used to address completeness,
valuation/measurement and occurrence.
vii) Inherent Risk or “What Can Go Wrong” – When we are designing audit
procedures to address an inherent risk or “what can go wrong”, we consider
the nature of the risk of material misstatement in order to determine if a
substantive analytical procedure can be used to obtain audit evidence. When
inherent risk is higher, we may design tests of details to address the higher
inherent risk. When significant risks have been identified, audit evidence
obtained solely from substantive analytical procedures is unlikely to be
sufficient.
Example

When side agreements with respect to revenue recognition have been

identified as a significant or fraud risk, it is unlikely that an analysis of sales
compared to cash receipts or cost of sales would be appropriate to respond
to that risk.

8.6 Techniques available as Substantive Analytical

Procedures

Trend Ratio
Analysis Analysis

Reasonab
Structural
leness
modelling
tests

The design of a substantive analytical procedure is limited only by the availability

of reliable data and the experience and creativity of the audit team. Substantive
analytical procedures generally take one of the following forms:
i) Trend analysis – Trend analysis is a commonly used technique. It is the
comparison of current data with the prior period balance or with a trend in

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two or more prior period balances. The auditor evaluates whether the current
balance of an account moves in line with the trend established with previous
balances for that account, or based on an understanding of factors that may
cause the account to change.
In other words, trend analysis implies analysing account fluctuations by
comparing current year to prior year information and, also, to information
derived over several years.
Example

The auditor may compare the salary paid by the company during the year under
audit with the salary paid by the company for several earlier years. There may be
some percentage increase in the salary expense over the years. However, an
unusual increase in such expense amount may indicate that fraudulent payments
are being made to fake employees.

ii) Ratio analysis – Ratio analysis is useful for analysing asset and liability
accounts as well as revenue and expense accounts. An individual balance sheet
account is difficult to predict on its own, but its relationship to another account
is often more predictable (e.g., the trade receivables balance related to sales).
Ratios can also be compared over time or to the ratios of separate entities
within the group, or with the ratios of other companies in the same industry.
Example
Financial ratios may include:
♦ Trade receivables or inventory turnover
♦ Freight expense as a percentage of sales revenue

Example

The statutory auditor can review the Gross profit ratio of the company for the year
under audit. The auditor can further compare such GP ratio with the GP ratio of the
company in the earlier years or the GP ratio of the other companies in the same
industry for the year under audit.

iii) Reasonableness tests – Unlike trend analysis, this analytical procedure does
not rely on events of prior periods, but upon non-financial data for the audit
period under consideration (e.g., occupancy rates to estimate rental income

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or interest rates to estimate interest income or expense). These tests are

generally more applicable to income statement accounts and certain accrual
or prepayment accounts. In other words these tests are made by reviewing
the relationship of certain account balances to other balances for
reasonableness of amounts.
Example

♦ Interest expense against interest bearing obligations

♦ Raw Material Consumption to Production (quantity)
♦ Wastage & Scrap % against production & raw material consumption
(quantity)
♦ Work-in-Progress based on issued of materials & Sales (quantity)
♦ Sales discounts and commissions against sales volume
♦ Rental revenues based on occupancy of premises

iv) Structural modelling – A modelling tool constructs a statistical model from

financial and/or non-financial data of prior accounting periods to predict
current account balances (e.g., linear regression).

8.7 Analytical Procedures used as Substantive Tests

When designing and performing substantive analytical procedures, either alone or
in combination with tests of details, as substantive procedures in accordance with
SA 330, the auditor shall:

Determine suitability of analytical procedure

Evaluate reliability of data

Develop an expectation

Determine acceptable difference

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(i) Determine the suitability of particular substantive analytical procedures for

given assertions, taking account of the assessed risks of material
misstatement and tests of details, if any, for these assertions;
(ii) Evaluate the reliability of data from which the auditor’s expectation of
recorded amounts or ratios is developed, taking account of source,
comparability, and nature and relevance of information available, and
controls over preparation;
(iii) Develop an expectation of recorded amounts or ratios and evaluate whether
the expectation is sufficiently precise to identify a misstatement that,
individually or when aggregated with other misstatements, may cause the
financial statements to be materially misstated; and
(iv) Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation.

8.8 Suitability of particular analytical procedures for given

assertions
1. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time.
2. The application of planned analytical procedures is based on the expectation
that relationships among data exist and continue in the absence of known
conditions to the contrary.
3. However, the suitability of a particular analytical procedure will depend upon
the auditor’s assessment of how effective it will be in detecting a
misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated.
4. In some cases, even an unsophisticated predictive model may be effective as
an analytical procedure.
Example

If an entity has a known number of employees at fixed rates of pay throughout the
period, it may be possible for the auditor to use this data to estimate the total
payroll costs for the period with a high degree of accuracy, thereby providing audit
evidence for a significant item in the financial statements and reducing the need to
perform tests of details on the payroll. The use of widely recognized trade ratios

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(such as profit margins for different types of retail entities) can often be used
effectively in substantive analytical procedures to provide evidence to support the
reasonableness of recorded amounts.

Different types of analytical procedures provide different levels of assurance.

Analytical procedures involving, for example, the prediction of total rental income
on a building divided into apartments, taking the rental rates, the number of
apartments and vacancy rates into consideration, can provide persuasive evidence
and may eliminate the need for further verification by means of tests of details,
provided the elements are appropriately verified. In contrast, calculation and
comparison of gross margin percentages as a means of confirming a revenue figure
may provide less persuasive evidence, but may provide useful corroboration if used
in combination with other audit procedures.
The determination of the suitability of particular substantive analytical procedure
is influenced by the nature of the assertion and the auditor’s assessment of the risk
of material misstatement. For example, if controls over sales order processing
are weak, the auditor may place more reliance on tests of details rather than
on substantive analytical procedures for assertions related to receivables.

Particular substantive analytical procedures may also be considered suitable when

tests of details are performed on the same assertion. For example, when
obtaining audit evidence regarding the valuation assertion for accounts
receivable balances, the auditor may apply analytical procedures to an aging
of customers’ accounts in addition to performing tests of details on
subsequent cash receipts to determine the collectability of the receivables.

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8.9 The reliability of DATA

The reliability of data is influenced by its source and nature and is dependent on
the circumstances under which it is obtained. Accordingly, the following are
relevant when determining whether data is reliable for purposes of designing
substantive analytical procedures:

(i)
• Source of Information

(ii)
• Comparability of the information

(iii)
• Nature & Relevance of Information

(iv)
• Controls over the preparation of the information

(i) Source of the information available. For example, information may be more
reliable when it is obtained from independent sources outside the entity;
(ii) Comparability of the information available. For example, broad industry data
may need to be supplemented to be comparable to that of an entity that
produces and sells specialised products;
(iii) Nature and relevance of the information available. For example, whether
budgets have been established as results to be expected rather than as goals
to be achieved; and
(iv) Controls over the preparation of the information that are designed to ensure
its completeness, accuracy and validity. For example, controls over the
preparation, review and maintenance of budgets.
The auditor may consider testing the operating effectiveness of controls, if any,
over the entity’s preparation of information used by the auditor in performing
substantive analytical procedures in response to assessed risks. When such controls
are effective, the auditor generally has greater confidence in the reliability of the
information and, therefore, in the results of analytical procedures. The operating
effectiveness of controls over non-financial information may often be tested in
conjunction with other tests of controls.
For example, in establishing controls over the processing of sales invoices, an
entity may include controls over the recording of unit sales. In these circumstances,

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the auditor may test the operating effectiveness of controls over the recording of
unit sales in conjunction with tests of the operating effectiveness of controls over
the processing of sales invoices. Alternatively, the auditor may consider whether
the information was subjected to audit testing. SA 500 establishes requirements
and provides guidance in determining the audit procedures to be performed on
the information to be used for substantive analytical procedures.

8.10 Evaluation of whether the expectation is sufficiently

precise
Matters relevant to the auditor’s evaluation of whether the expectation can be
developed sufficiently precisely to identify a misstatement that, when aggregated
with other misstatements, may cause the financial statements to be materially
misstated, include:
(i) The accuracy with which the expected results of substantive analytical
procedures can be predicted.
For example, the auditor may expect greater consistency in comparing gross
profit margins from one period to another than in comparing discretionary
expenses, such as research or advertising.
(ii) The degree to which information can be disaggregated.
For example, substantive analytical procedures may be more effective when
applied to financial information on individual sections of an operation or to
financial statements of components of a diversified entity, than when applied
to the financial statements of the entity as a whole.
(iii) The availability of the information, both financial and non-financial.
For example, the auditor may consider whether financial information, such
as budgets or forecasts, and non-financial information, such as the number
of units produced or sold, is available to design substantive analytical
procedures. If the information is available, the auditor may also consider the
reliability of the information.

8.11 Amount of difference of recorded amounts from

expected values that is acceptable
The auditor’s determination of the amount of difference from the expectation that
can be accepted without further investigation is influenced by materiality and the

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consistency with the desired level of assurance, taking account of the possibility
that a misstatement, individually or when aggregated with other misstatements,
may cause the financial statements to be materially misstated.
SA 330 requires the auditor to obtain more persuasive audit evidence the higher
the auditor’s assessment of risk. Accordingly, as the assessed risk increases, the
amount of difference considered acceptable without investigation decreases in
order to achieve the desired level of persuasive evidence.

8.12 Investigating results of Analytical Procedures

If analytical procedures performed in accordance with SA 520 identify fluctuations
or relationships that are inconsistent with other relevant information or that differ
from expected values by a significant amount, the auditor shall investigate such
differences by:
(i) Inquiring of management and obtaining appropriate audit evidence
relevant to management’s responses: Audit evidence relevant to
management’s responses may be obtained by evaluating those responses
taking into account the auditor’s understanding of the entity and its
environment, and with other audit evidence obtained during the course of
the audit.
(ii) Performing other audit procedures as necessary in the circumstances:
The need to perform other audit procedures may arise when, for example,
management is unable to provide an explanation, or the explanation,
together with the audit evidence obtained relevant to management’s
response, is not considered adequate.

8.13 Analytical procedures that assist when forming an

overall conclusion
The conclusions drawn from the results of analytical procedures designed and
performed in accordance with, are intended to corroborate conclusions formed
during the audit of individual components or elements of the financial statements.
This assists the auditor to draw reasonable conclusions on which to base the
auditor’s opinion.

The results of such analytical procedures may identify a previously unrecognised

risk of material misstatement. In such circumstances, SA 315 requires the auditor

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to revise the auditor’s assessment of the risks of material misstatement and modify
the further planned audit procedures accordingly.

Test Your Understanding 10

An auditor of a company intends to apply analytical procedures for verifying
revenue. Discuss any two analytical procedures which may be performed by auditor
relating to revenues.

CASE STUDY 1
CA Drishti Khandelwal is conducting audit of a company engaged in manufacturing
of towels and bedspreads. The company is having its own manufacturing set-up.
However, it also gets some manufacturing processes outsourced from third parties.
The company has three locations having substantial quantities of inventories in the
same city. Besides, due to outsourcing of some processes, inventories are also held
in premises of third parties in the same city. As part of audit procedures, she is
performing many audit procedures required by different Standards on Auditing.
In particular, she is attending physical inventory count process of the company at
year end in accordance with requirements of SA 501.The inventory of the company
includes raw materials consisting mainly of natural and dyed yarns, work in process
in different stages of manufacturing and finished stocks of towels and bedspreads.
She is also planning sending confirmations to parties to whom the company has
sold goods. On reviewing trade receivables list, she finds that the list also contains
large number of parties having small balances. She further finds that these
receivables have arisen due to sale of bedspreads to small time retailers and
possibility of difference in balances as per company’s records and as per records of
these small-time retailers is low. Risk of misstatements in relation to trade
receivables has been assessed as low. Besides, there is nothing to suggest that
small-time retailers would disregard such requests.
While conducting audit, she is testing controls operating in the company. She is
also conducting tests of various items of income and expenditure as well as
balances appearing in balance sheet. She intends to rely upon sampling extensively.

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